Financing Defense in an Era of Global Conflict: Strategies, Investment, and Economic Impact – OMFIF

Discussion of defence quickly shifts to targets: public spending, weapons and ammunition production, international cooperation, and security and resilience. Setting these objectives is one challenge; achieving them is another. Governments must balance fiscal constraints, low growth, public expectations, and high debt against a rapidly evolving security landscape.

The global environment has changed dramatically in recent years. While the Russia‑Ukraine conflict and the US‑Israel‑Iran standoff dominate headlines, thinly veiled threats to sovereignty are emerging worldwide. Nations feel an urgent need to bolster military readiness, yet most—particularly in western Europe—are far from meeting those requirements.

The September 2026 edition of the OMFIF Bulletin tackles the complex questions of defence financing. It calls for greater public and private investment and examines mechanisms to scale funding. The publication explores macroeconomic effects, capital‑market implications, and sovereign‑debt considerations against a backdrop of energy insecurity and climate crisis.

The public view

As an active war zone, Ukraine faces daily defence and military demands. Yuriy Butsa, the government commissioner for public‑debt management at the Ministry of Finance, explains how Ukraine’s procurement strategy has evolved since Russia’s 2022 invasion. “Early in the war we sought large, slow‑moving metal assets,” he notes. “Four years later, such targets do not survive on a battlefield saturated with sensor‑driven drones.” Ukraine has therefore adopted a decentralised approach, distributing smaller public‑fund allocations across competing solutions rather than committing large sums to a single pre‑selected vendor.

Globally, the funding gaps caused by low investment, sluggish production, and supply‑chain bottlenecks are prompting calls for new mechanisms. The Defence, Security and Resilience Bank (DSRB), which has nine founding members including Canada, is presented as one solution. Rob Murray, chair of the international treaty negotiations for the DSRB, describes the bank as “part of the missing financial plumbing” that links existing programmes to provide long‑term, low‑cost financing backed by sovereign guarantees.

Two International Monetary Fund articles—one from the multilateral surveillance division and another from fiscal affairs—analyse Europe’s rearmament drive. The first article argues that the goal should not merely be higher defence spending but more strategic and targeted investment. The second notes that EU defence expenditure rose 30 % between 2021 and 2024 and asks what impact this will have on the economy. IMF research, it says, “shows that defence spending can support economic activity in Europe, but its impact depends critically on how the spending is designed and financed.”

Upcoming research from the European Bank for Reconstruction and Development examines how frequently economies develop new defence‑export capabilities and which conditions can foster such industries. It finds that entering military markets is challenging, yet policy support and specialisation can yield long‑term success, meaning conflict can act as a catalyst for building a competitive defence sector.

The private view

Defence has moved from the periphery of public finance to the centre of investment cycles. Rebecca Chesworth of State Street Investment Management notes that defence is now a defining element of investment strategies, while Georgi Yordanov of Citi writes that defence finance is becoming integral to strategic infrastructure. Jonathan Lewis of Clifford Chance LLP outlines European options ranging from defence bonds to new multilateral initiatives.

A significant share of increased spending will flow to the technology sector, raising governance and regulatory questions. Nout Wellink, president of De Nederlandsche Bank from 1997‑2011, warns that governments, businesses, and societies are growing dependent on services from these tech firms, and that their governance must be urgently re‑examined.

Looking ahead, Tom Clooney of Capital Group foresees continued polarisation, uncertainty, and further erosion of the liberal world order. Christopher Smart of Arbroath Group echoes this sentiment, observing that “the increasingly caustic exchanges on military and political differences have now fundamentally changed the economic relationship” between the US and Europe, and that “the surface cracks may start to threaten the foundation of the vast economy stretching from Los Angeles to Lviv.”

Even in a fractured environment, opportunities exist. EY modelling suggests that the proposed defence‑spending increase could permanently lift growth and productivity, adding £30 billion to UK GDP each year. Moody’s Ratings cautions, however, that outcomes will hinge on execution, not just ambition. Credit implications will be shaped less by headline spending figures than by how expenditures are coordinated, financed, and deployed.

Energy sovereignty and security

Defence was long viewed as incompatible with sustainability, but that perception is shifting. Marcus Pratsch of DZ BANK argues that civil defence, security, and resilience are not opposites of sustainability but prerequisites for it. “Given that defence and security extend far beyond armaments and that the world has undergone profound transformation,” he says, “it would be irresponsible to exclude this topic entirely from the sustainable‑finance agenda.”

Marina Petroleka of Sustainable Fitch expands on this trend, noting that some investors are revisiting exclusion criteria and introducing caveats for specific geographies, technologies, and sectors where civilian and military objectives intersect. She also highlights the emergence of defence‑labelled debt instruments—use‑of‑proceeds (UoP) frameworks—that provide definitional discipline for sustainable investors. “UoP frameworks purpose‑built for defence,” she explains, “offer a dedicated channel for building capital for Europe’s security, without stretching GSS labels beyond their intended scope.”

Furthering the conversation

This Bulletin builds on a series of thought‑provoking dialogues OMFIF has held throughout 2026, from the Defence Funding Forum in London in May to the monthly Money Disrupted roundtable series. These conversations have uncovered serious gaps in the global financial architecture and examined potential solutions, recognising that none is a silver bullet but all point toward a more resilient approach to security.

The discussion will continue at OMFIF’s upcoming Defence Forum on 17 November in London. The event will bring together public‑ and private‑finance leaders, defence‑industry executives, and policymakers to confront the financing and industrial challenges of western rearmament.

Sarah Moloney is Editorial Director at OMFIF.

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